Each tax filer must have lived in the house as their primary residence, for at least 2 years of the last five years they owned it. So once they have both lived in the house they purchased together, for 2 years, as their primary residence, they will each be eligible for the $250K capital gains exclusion. If they both lived in the property for 2 of the last five years and file a joint return, they will be eligible for a total of $500K capital gains exclusion. Each of them can only claim the exclusion one time only, in a 2 year period.
For the house owned by the wife only - If she lived in it as her primary residence for at least 2 of the last five years she owned it, counting backwards from the closing date of the sale, then she will qualify for a $250K capital gains exclusion, *PROVIDED* she has not claimed that exclusion in the previous 2 tax years prior to the sale.
For the house owned by the husband only - If he lived in it as his primary residence for at least 2 of the last five years he owned it, counting backwards from the closing date of the sale, then he will qualify for a $250K capital gains exclusion, *PROVIDED* he has not claimed that exclusion in the previous 2 tax years prior to the sale.
Understand that the house does NOT have to be the primary residence "at the time" of the sale. But it *must* have been the primary residence for "at least" 2 years, of the last 5 years they owned the house, prior to the sale.
